Fixed Annuitization Method

What Is the Fixed Annuitization Method?

The fixed annuitization method is one of three methods by which early retirees of any age can access their retirement funds without penalty before turning 59½. The fixed annuitization method divides the retiree's account balance by an annuity factor taken from IRS tables to determine an annual payment amount.

The annuity factor is based on IRS mortality tables and an interest rate that is less than 120% of the federal mid-term rate. Once the payment amount is determined, it cannot be changed. This is also known as 72(t) distributions or Substantially Equal Periodic Payments (SEPP).

How the Fixed Annuitization Method Works

The two other methods for early, penalty-free retirement withdrawals are the fixed amortization method and the required minimum distribution method. Each method can result in quite different distribution amounts. The fixed annuitization method is the most complicated but sometimes offers the highest payments.

Typically, funds withdrawn before age 59½ are assessed a 10% early withdrawal penalty. Funds must be withdrawn as substantially equal periodic payments as outlined by Internal Revenue Code Section 72(t). They must continue for five years or until the retiree reaches 59½, whichever is longer. Retirees can elect to receive their distributions annually, quarterly, or monthly. If withdrawals are stopped, all funds that have already been withdrawn become subject to early withdrawal penalties.

IRS Calculation Methods

According to the IRS, the required minimum distribution method consists of an account balance and a life expectancy (single life, uniform life, and joint life and last survivor, each using attained age(s) in the distribution calculation year). The annual payment is redetermined each year. 

The fixed amortization method consists of an account balance amortized over a specified number of years equal to life expectancy (single life, uniform life, or joint life and last survivor) and an interest rate of not more than 120% of the federal mid-term rate.

Once an annual distribution amount is calculated under this method, the same dollar amount must be distributed in subsequent years.

The fixed annuitization method consists of an account balance, an annuity factor, and an annual payment. The annuity factor is calculated based on the mortality table in Appendix B of Rev. Rul. 2002-62 and an interest rate of not more than 120% of the federal mid-term rate. Once an annual distribution amount is calculated under this method, the same dollar amount must be distributed in subsequent years.

Deciding which method to use can be complicated. It's wise to get professional advice when seeking to take an early distribution.